What is Reputational Risk? An Introductory Guide

As Warren Buffett once said, it takes 20 years to build a reputation and just five minutes to ruin it.

That’s why smart organizations and their leaders are laser-focused on doing everything they can to cultivate and maintain sterling reputations.

According to a 2020 study from Weber Shandwick, executives collectively attribute 63% of organizational value to their company’s reputation. When consumers think highly of your leadership, it’s easier to cultivate customer loyalty, drive sales, and attract investors. On the flipside, when your reputation declines, trust erodes — and, if your organization is publicly traded, your market cap does, too, as CrowdStrike knows too well.

For this reason, it comes as no surprise that reputation is a top-three risk for 26% of organizations, and a top-five risk for 55% of them.

Keep reading to learn more about the common sources of reputational risks, their impacts, and strategies you can use to preserve your reputation.

What is reputational risk & why is it important?

Reputational risk refers to the potential damage that can happen to a company’s reputation, which can lead to significant financial consequences and other undesirable outcomes. In many cases, reputational risks are brought about by unethical behavior, regulatory violations, or negative publicity. These events negatively impact how stakeholders — customers, investors, employees, and the public — perceive the organization.

Understanding reputational risk is important because a damaged reputation can result in a loss of customer trust, reduced sales, and diminished investor confidence. Depending on how bad it gets, reputational damage can even threaten a company’s survival.

For example, blood-testing startup Theranos was once a media darling that boasted a $9 billion valuation. By 2018, that all changed when investigators determined that founder Elizabeth Holmes was lying about the capabilities of her company’s technology. Ultimately, Theranos was charged with fraud and collapsed; Holmes ended up in jail.

What are the effects of reputational risk?

Reputational risk can have a detrimental impact on organizational success due to these key impacts:

• A loss of customer trust. When a company’s reputation or that of its leaders is damaged, customers may lose trust and switch to a competitor, leading to a decline in sales and market share.
• Decreased revenue. A tarnished reputation can reduce demand for products and services, directly impacting the company’s revenue and profitability.
• Difficulty in attracting talent. Since people prefer to work for organizations that have positive public images, a negative reputation can make it challenging to attract and retain skilled employees. In an era where nearly 80% of employers are struggling to fill open positions, this is a huge deal.
• Increased regulatory scrutiny. Companies facing reputational issues may attract more attention from regulators, resulting in potential legal challenges, fines, or stricter oversight. For example, Wells Fargo employees were found to have created millions of unauthorized accounts without consent between 2002 and 2016; in 2020, the company was fined $3 billion.
• Weakened business partnerships. If your reputation gets ruined, existing business partners might think twice about continuing your engagement, and potential partners might not move forward with a collaboration in the first place.

What are some common sources of reputational risk?

Reputational risk can come from any number of sources. In this section, we’ll examine five of the more common ones that can impact companies and their leaders.

1. Unethical business practices

Engaging in unethical activities — like fraud, bribery, or deceptive marketing — can quickly tarnish a company’s reputation. Once such practices are exposed, they can lead to legal action, loss of customer trust, and long-lasting damage to the company’s brand and market position.

Example: In 2015, Volkswagen faced massive reputational damage when the press found out that the company has installed software in diesel vehicles to cheat emissions tests. Altogether, the scandal cost the company upwards of $33.3 billion.

2. Poor customer service

Consistently poor customer service — including slow response times, unresolved complaints, or disrespectful interactions — can shatter customer trust and loyalty. In an age where negative experiences are often shared widely on social media, a single bad customer service episode can cause tons of damage.

Example: United Airlines faced severe backlash in 2017 after a passenger was forcibly removed from an overbooked flight. The incident was captured on video, went viral, and resulted in a public relations crisis.

3. Regulatory non-compliance

Failing to comply with industry regulations or legal standards can result in fines, sanctions, and lawsuits. Beyond the financial penalties, noncompliance can signal a lack of integrity or proper management, leading to increased scrutiny from regulators.

Example: In 2001, Enron collapsed after details of widespread accounting fraud were made public. The scandal led to criminal charges, the company’s bankruptcy, and significant changes in regulatory practices (e.g., the Sarbanes–Oxley Act).

4. Employee misconduct

Actions such as discrimination, harassment, and unethical behavior by employees and leadership can reflect poorly on the entire organization. If not addressed promptly and effectively, such incidents can lead to public scandals, legal action, and a loss of trust.

Example: Uber suffered reputational damage in 2017 following multiple allegations of workplace harassment, discrimination, and a toxic culture. The publicized misconduct ultimately led to the resignation of CEO Travis Kalanick, along with a loss of trust among employees and customers alike.

5. Negative press coverage

Adverse press — whether resulting from scandals, controversies, or poorly managed crises — can spread quickly, damaging a company’s public image. Unfortunately, negative media attention often shapes public perception, leading to boycotts and employee retention challenges.

Example: In 2010, BP faced intense negative media coverage after the Deepwater Horizon oil spill, one of the worst environmental disasters in history. The extensive media attention on BP’s role in the spill caused severe reputational harm, legal battles, and financial losses.

How can a company assess its reputational risk?

To safeguard your company’s image and maintain trust, take these steps to mitigate reputational risk:

• Stakeholder analysis. Identify key stakeholders — including customers, employees, investors, regulators, and the public — and work to understand their perceptions, expectations, and concerns regarding your company’s products and practices.
• Media monitoring. To gauge public sentiment and detect potential reputational threats early, continuously monitor media channels, including social media, news outlets, and online forums. While you’re at it, consider using social listening platforms like Meltwater and Hootsuite to help track mentions and identify trends that might impact your reputation.
• Internal audits and compliance checks. Regularly conduct internal audits to ensure compliance with legal and regulatory requirements. By doing so, you can assess business practices, employee conduct, and customer service procedures to identify areas that could lead to reputational risk if not addressed.
• Scenario planning and stress testing. Start thinking about predictable scenarios that could harm your company’s reputation. Maybe a product release goes poorly, maybe you suffer a data breach, or maybe you experience a bona fide PR crisis. Consider running stress tests to gauge how ready your company is to respond effectively to such scenarios.
• Engaging with stakeholders. By engaging with stakeholders often, your organization can gather feedback and address concerns. Maintaining open lines of communication enables you to identify reputational risks and build trust, helping your company respond proactively to potential issues before they spiral into massive problems.

How to protect against reputational risk

While you can’t eliminate reputational risk altogether, you can take a proactive approach that makes it easier to maintain a positive image and address potential threats quickly should they arise.

Publish thought leadership content regularly

As the saying goes, the best defense is a good offense. By publishing articles, white papers, and thought leadership content on a regular basis, your company can establish and maintain a strong presence in industry discussions.

When you share valuable insights and expertise consistently, you prioritize reputation management, positioning your organization as a trusted authority in your field. Not only does this proactive approach showcase your company’s knowledge, it also helps positively shape public perception.

Implement strong ethical standards

When you establish a robust code of ethics that covers all aspects of business — from everyday operations to leadership expectations — you set clear guidelines for behavior while ensuring accountability at all levels. By fostering a culture of integrity, you can prevent unethical practices that can lead to Enron-style reputational damage.

Develop a comprehensive crisis management plan

Another way to mitigate reputational risk is by preparing for potential crises ahead of time and developing a detailed crisis management plan that details procedures for communication, decision-making, and response during a reputational threat.

Such a plan should include predefined roles for key personnel, protocols for internal and external communication, and strategies for mitigating damage. Regularly updating and practicing this plan can help ensure response readiness when every second counts.

Want to put a plan together but not sure where to start? One solution could be joining forces with an agency that works with leaders to manage reputational risk and project a positive leadership brand.

Learn more about what that process looks like.